Eastspring Investments
Sept 2025 | 5 min read
Summary
This trade deal has eased prior concerns over steep tariffs—particularly on autos—but also positioned Japan as a preferred U.S. trading partner. While political uncertainty surrounding Prime Minister Ishiba’s potential resignation may introduce volatility, markets expect policy continuity. From an investment perspective, Japanese automakers may gain competitive advantage, domestic consumption could benefit from lower rice prices, and industrials may see revived capital expenditure, all contributing to a more constructive outlook for Japanese equities.
On 23 July 2025, Japan and the US announced a surprise trade deal, which included:
- A fall in the reciprocal tariff rate on Japanese imports to 15% with no quotas
- Japan investing USD550b in the US
- Japan opening up its domestic market to US imports of cars and trucks, rice and certain agricultural products
This was a positive development from the earlier announced tariffs of 25% for autos/auto parts (which accounts for about 40% of Japan's US exports) and 10% for other goods, with the latter previously set to rise to 25% from 1 August. Meanwhile Japan is already a sizeable investor in the US.
Beyond the tariff reduction, the deal also subtly positions Japan as a preferred US trading partner amid ongoing global tariff escalations, as 15% marks the second lowest rate among major economies aside from the UK, potentially giving Japanese exporters an edge moving forward, particularly if other key regions/countries face higher tariffs.
The trade deal triggered a sharp rally on 23 July in cyclical and external demand-sensitive stocks. TOPIX rose to 2,950 while the Nikkei 225 surpassed 41,000 as of 25 July (Friday). Autos, banks (due to expectations of an earlier rate hike), and machinery led the market. The tariff cut is expected to reduce the negative earnings per share impact on TOPIX constituents, but some of that has already been reflected in the last two trading days.
Market leadership was concentrated in structural growth and momentum names (e.g. AI, defense, domestic IT and gaming). With improved trade clarity, market sentiment may induce more cyclical/export-driven names and financials to perform.
Soon after the deal was announced, reports emerged that Prime Minister Ishiba is considering stepping down by end-August as his intention to stay on was largely driven by the need to secure an agreement with the US.
Political uncertainty may introduce volatility, but the rumoured resignation of PM Ishiba has not been regarded by the market as a material risk as reaction has been muted thus far. Most leadership candidates (except Takaichi in the Liberal Democratic Party) favour normalisation of monetary and fiscal policy. Therefore, the market currently expects policy continuity.
With more clarity now, short-term support for the yen may emerge due to the now-increased likelihood of an earlier BoJ rate hike. The BoJ had been cautious due to trade and economic uncertainty, so tariff clarity should help to mitigate this. However, current political uncertainty is likely to limit notable yen appreciation.
Meanwhile, if fiscal instability arises from political turnover, there may be pressure for the yen to depreciate and long-end yields to rise. However, as the opposition parties are divided on the magnitude of consumption tax cuts and other issues, market believes the likelihood of passing a unified fiscal expansion proposal seems low at this point
Investment Implications
Our Japan equity team believes the trade deal reduces the uncertainty of potential economic impact of tariffs on the economy, and the agreed tariff rate has turned out to be more favourable than what market participants estimated. As for impact on key sectors:
Autos: Given the favourable tariff rate, it is possible for the automakers to gain from competitive positioning if Europe and other nations end up facing higher tariff rates.
Domestic sectors: With Japan increasing US rice imports by 75%, this can potentially lower rice prices and alleviate some of the price pressure. In turn, this may allow more room for wage growth to boost consumer sentiment and domestic consumption.
Factory automation and investment-sensitive segments may be better positioned to benefit from companies reviving their capital expenditures that were placed on hold because of tariff uncertainty, but more time is needed to assess actual impact.
In the wake of the US trade deals with Vietnam, Indonesia, Philippines and now Japan, our Multi-Asset Portfolio Solutions team expects more countries to arrive at deals, or at least some framework of sorts. Global trade tensions have likely peaked since Trump unveiled his trade agenda on April 2nd ‘Liberation Day’. To the extent there continues to be progress in global trade discussions (alongside improved geopolitical developments), the team believes that extreme left-tail growth risk scenarios are now less likely. As such, in the absence of new shocks or negative catalysts (i.e., oil or trade shocks), risk assets can potentially continue to perform well over the near-term, tactical horizon.
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